Banking reporter

Former Treasury secretary Ken Henry says population growth will place greater demand on infrastructure and he predicts a revenue shortfall over the coming years. Photo: Alex Ellinghausen

STATE and federal governments must extract more tax revenue if they are to fund the nation's ballooning infrastructure needs in decades to come, former Treasury secretary Ken Henry says.

In the latest prediction that Canberra will face a revenue shortfall, Dr Henry yesterday said the taxman's share of the economic pie had shrunk since the global financial crisis. This would remain the case without major change.

At the same time, he said the projected growth in the population would place growing demands on government spending on vital infrastructure. State governments without the buffer of mining royalties were especially vulnerable, and they faced a ''desperately bad'' situation, he said. The warning comes after Treasury secretary Martin Parkinson, last week said the days of big budget surpluses were gone, and the run of Howard government tax cuts in the mid-2000s were funded by a ''temporary bubble'' in revenue.

''It is true as Martin said the other day that the Australian tax base simply will not deliver what people expect of it,'' Dr Henry said.

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''In the states, they are in a much worse position. The states' revenue systems are especially fragile.

''At the moment it looks OK for the resource-rich states, and for the others it looks desperately bad. But even for the resource-rich states … at some stage the royalties will deliver less revenue than they are presently delivering,'' said Dr Henry, now an economic adviser to the Prime Minister and NAB board member.

Tax revenue growth has been weak in recent years due to weak capital gains in the property and share markets, and a peak in commodity prices.

Australia's tax revenue as a share of gross domestic product is among the lowest in the developed world. It is estimated to have fallen to 23.8 per cent this financial year, compared with more than 25 per cent for much of the previous decade, but Dr Henry said it would not revisit these levels.

State government budgets draw heavily on the GST, but it has also been hit by weaker household spending.

Amid these pressures on revenue, Dr Henry said it was often forgotten that the country's population was expected to expand by 14 million people in the next 14 years, increasing demand for infrastructure.

'The fundamental question of course confronting all of us about that infrastructure build requirement is how's it going to be funded?'' he said.

His comments come as a high-powered advisory group considers how it may fund a cut in the company tax rate through cuts to other business tax benefits - a proposal that has met a lukewarm response in the business community.

Highlighting this, Boeing's president for Asia and the Pacific, Ian Thomas, said he supported lower taxes, but not cuts to breaks for research and development.